‘Under the “Arbitation Clause” no Party Can seek remedy without exhusting the arbitration procedure embedded in the contract”. Discuss


While having a contract parties may have some disputes regarding the issue mentioned in a contract. If there is any contract that bears the term arbitration clause then the parties are bound to solve that dispute through arbitration process. Arbitration is a dispute resolution process which is an alternative to the traditional lawsuit in court. These types of dispute are solved by arbitrators who are impartial knowledgeable persons in the area of controversy. The parties must solve their problems by arbitration process before taking the dispute to the court. For over 200 years arbitration has been a dispute resolution mechanism, it was not until the decision of the US Supreme Court in Shearson v. MacMahon , 482 U.S. 220 (1987) that arbitration became the most widely used means of resolving dispute among two parties.[1] It allows the parties to solve their dispute in a quicker and a cheaper ay than the court. The arbitrator’s decision is final and not subject to appeal. If anyone’s unhappy with the decision s/he cannot go to court and try again. An arbitrator’s decision can be challenged in a very limited situation such as if it can be proved that the arbitrator was biased. Because of the resolving dispute purpose arbitration has become a widely used phenomenon around the world.

 2. Definitions and Explanations:

Some key terms related to the topic are discussed below.

2.1 Arbitration: It is an Alternative Dispute Resolution (ADR) process where evidence of both the parties are presented and verified by a panel of arbitrators and they make decision for the parties. Arbitration process is adversarial and typically win-lose as in like court based adjudication. The presentations are made to prove one side wrong and the other side right.[2] According to Arun Kumar Sen arbitration means “a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not.”[3] Sec.2(a).[4] In the United States, arbitration is most commonly used in labor-management, commercial, and consumer conflicts. In 1985, more than 95 percent of all collective bargaining contracts required that arbitration be used to resolve disputes.[5]

Different types of arbitration according to A. K. Sen –

  1.                        i.            Arbitration without intervention of the court: Section 3-25 is related to this type of arbitration.[6] This process takes place outside the court. There is no suit pending but the award of arbitration can be filed in court and executed through court.
  2.                      ii.            Arbitration through court when no suit is pending: In an arbitration agreement the parties can proceed with the arbitration independently.[7] Section 20 provides an alternative which both parties can follow. If there is any arbitration agreement without any suit pending then the parties can apply for filing an agreement to the court. Court issues notice to the other party to show cause why there should not be an agreement filed. If the party fails to show cause then the court files the arbitration and makes an order of reference to the arbitrator.
  3.                     iii.            Arbitration a Suits: after a suit is filed the parties can decide to settle the matter by arbitration. This procedure is laid in section 21-25. If all the parties are interested in a suit filed and that any matter in difference between them in the suit shall be referred to as arbitration. The arbitrator should be appointed in such a manner as the parties agree. Even they can make the judge the arbitrator in which case judgment becomes an award and is not appealable. After an order of reference is made in the arbitration takes place in the same manner as arbitration without intervention in the court.

 2.2 Contract: It is an agreement in which two or more parties enter voluntarily to create a legal obligation. Contracts can be both oral or in written form. It is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used a legal synonym for the word contract but it might not be a proper synonym if in case it is an agreement without consideration.[8] A formal definition of the contract can be found in the Indian contract act 1872[9], which defines agreement as “every promise and every set of promises forming consideration[10] for each other.” Section 2(b) defines promise in these words: “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted”.

Contract law differs from one jurisdiction to another including variations among common law[11] and civil law.[12] Contract law is based on the principle expressed in the Latin phrase ‘pacta sunt servanda’ which is usually translated “agreements must be kept” but more literally means “pacts must be kept”.[13] Contract has some elements such as-

a) Offer and acceptance[14]

b) Intentions to create legal relationship[15]

c) Consideration[16]

d) Capacity of parties[17]

e) Free consent[18]

f) Legality of the object[19]

g) Certainty[20]

h) Possibility of performance[21]

i) Void agreements[22]

 2.3 Arbitration clause: It is a clause that is used in a contract mainly to resolve the dispute among parties by arbitration process outside the court. In the US in order to reduce the burden of the court for resolving disputes the government expressed a policy of support for arbitration clauses. It is found in the Federal Arbitration Act which permits compulsory and binding arbitration allowing parties to give up right to appeal an arbitrator’s decision to a court.[23] Arbitration clauses are combined with geographic forum selection clauses[24] and choice of law clauses[25] which are both fully enforceable. An arbitration clause may be challenged and held invalid if it is found that the arbitrator was biased. In Graham v. Scissor-Tail, Inc, 623 P.2d 165 (Cal. 1981), as for example the Supreme Court of California found that an arbitration clause in a contract of adhesion which necessarily puts disputes before a body that would tend to be biased towards the defendant, is unduly oppressive, and therefore void as unconscionable. For this reason, many arbitration clauses designate widely recognized neutral organizations such as the American Arbitration Association.[26]

 2.3.1 Informal clauses:

The informal clauses that are upheld for the validity of the arbitration are –

  • “arbitration in London – English law to apply”.[27]
  • “suitable arbitration clause”.[28]
  • “arbitration, if any, by ICC rules in London”.[29]
  • The arbitrators must not “necessarily judge according to the strict law but as a general rule ought chiefly to consider the principles of particular business”.[30]
  • “internationally accepted principles of law governing contractual relations”.[31]

 2.3.2 Sample clauses:

  • The chartered Institute of Arbitrators: “Any dispute or difference arising out of or in connection with this contract shall be determined by the appointment of a single arbitrator to be agreed between the parties, or failing agreement within fourteen days, after either party has given to the other a written request to concur in the appointment of an arbitrator, by an arbitrator to be appointed by the President or a Vice President of the Chartered Institute of Arbitrators.”
  • The London Court of International Arbitration: “Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA[32] Rules, which Rules are deemed to be incorporated by reference into this clause.

The number of arbitrators shall be [one/three].

The seat, or legal place, of arbitration shall be [insert city or country].

The language to be used in the arbitral proceedings shall be [insert language].

The governing law of the contract shall be the substantive law of [insert governing law].”

 3. Arbitration Procedures:

     3.1 Steps in the arbitration procedure according to NADR – Nationwide Academy for Dispute   resolution (UK)[34]

Step 1

Dispute arises

Step 2

Request for and submission of dispute to arbitration to a specific arbitrator or institution.

Step 3

Parties agree on an arbitrator or arbitrator appointed by an arbitral institution or court.

Step 4

Arbitrator accepting appointment of the disputants.

Step 5

Preliminary meeting with everyone in an joint session or via telephone conference.

Step 6

Arrangement for the arbitration process including venue hiring and travelling with or without the help of arbitration institution.

Step 7

Arbitrator issues directions.

Step 8

Preliminary hearings and interim awards possible in respect of security of costs, scope of arbitration agreement etc.

Step 9

Submission of claims, counter claims and response to counter claims.

Step 10

Discovery and preparation of agreed documents.

Step 11

Preparation of expert reports.

Step 12

Hearing- all parties, representatives, witnesses, experts and arbitrators.

Step 13

Award: decision and cost (The End)

Step 14

If non compliance- action for enforcement or challenge of or to award.

 3.2 Steps followed in an arbitration procedure according to FINRA-Financial Industry Regulatory Authority.[35]

File a claim: a disputant initiates arbitration by filing a claim that specifies the relevant facts and remedies that are requested.

Answer a claim: A respondents answers back to the claim filed by the claimant that specifies the relevant facts and available defenses to the statement of claim.

Arbitrator selection: The parties receive the list of potential arbitrators and they select the panel to hear their case.

Prehearing conferences: before hearing the parties contact via telephone conferencing to schedule their hearing dates and resolve preliminary issues.

Discovery: It is the exchange of documents and information in preparation for the hearing.

Hearings: The parties and arbitrators meet personally to conduct hearing where the parties present their evidence and arguments to support their respective cases.

Decision and awards: After hearing, the arbitrators verify the evidence provided by the parties and render a written decision called an award.

 3.3 Arbitration procedure in Hong Kong: There is no fixed procedure to be followed but rules should be informal where the arbitrator is the authority.[36] For domestic arbitration parties are told to adopt the Domestic Arbitration Rules[37] by HKIAC.[38]

The procedures to be followed are-

  • At first the claimant will ask for a preliminary meeting to be held with the parties where rules of arbitration will be decided by the arbitrator. As well as his fee structure and the time table of the pleadings.
  • Then there will be preparation of pleadings like the court apart from being less formal. This is done to make the parties understand everything easily and save time.
  • The exchange of lists of documents is limited to certain types in order to reduce both the time and cost for resolving the dispute.
  • The date of main hearing is dependent on the submission of all documents and the parties can fix a date whenever they are ready.
  • Before hearing the exchange of evidence both factual and expert is required to find out whether there is any common ground or facts that can be agreed between the parties. This also helps in reducing the time of the entire process.
  • Based on the evidence provided the arbitrator will finally give an award which will depend on the prior request of the parties. The losing party will bear all the costs including arbitrator’s fee.
  • The arbitrator’s award is final which is subject to a limited right to appeal to the court under section 23 of Arbitration Ordinance of domestic arbitration. The legal costs are subject to taxation and the tax costs will be two third of the actual costs spent by the winning party in the process.

 3.4 Arbitration procedures followed in mainland China are as follows-

In this case there will be 3 arbitrators, one presiding arbitrator and 2 co-arbitrators.

  • After exchanging the documents CIETAC[39] will fix a hearing date. There can be documents-only basis arbitration which is suitable to solve substantial disputes on matter of facts.
  • After the hearing the award is made by the 3 arbitrators. If failed to give an award by the arbitrators then simple majority will decide the award. The rule for arbitration states that the award should be rendered six months after the tribunal is formed. Time can be extended by CIETAC and the award is reviewed by the CIETAC after rendering.
  • The tribunal has the authority to decide the fees and expenses to be paid by the parties as well as the compensation to be paid to the winning party.
  • Parties can request for an additional award if any claims or counter claims were omitted. Tribunal has to issue additional award within 30 days of the request from the parties.
  • Before the final award is made, partial award can be made by the tribunal if they find it necessary and if the parties apply for one.
  • There is also scope for summary procedure if the parties agree in having it which allows a disputed amount below RMB[40] 500,000 or above RMB 500,000. When summary procedure is accepted then the CIETAC will issue a notice of arbitration.
  • In this case the time limits are shorter than the normal procedure as the award will be provided within three months from the date of tribunal formed.

 4. Advantages and Disadvantages of Arbitration:

4.1 Advantages:

  • Arbitration is faster than the litigation in court.
  • It is cheaper and more flexible for businesses than adjudication.
  • The disputants can choose their own arbitrator who might be an expert in the topic of dispute which makes arbitration especially useful in complex, technical commercial disputes.
  • Arbitral proceedings and arbitral award are generally non public and confidentiality is maintained.[41]
  • In case arbitration the language can be chosen by the disputants whereas in judicial proceedings the official country language is applied.
  • Because of the provisions of New York Convention 1958 arbitration awards are easier to enforce in other nations than court judgments.
  • The limited avenue for appeal of an arbitral award is advantageous as it limits the duration of dispute and associate liability.

 4.2 Disadvantages:

  • Arbitration process is adversarial as it leads towards a win-lose solution which doesn’t help building good relationship.
  • Sometimes this process might become highly complex.
  • Arbitration process might prefer the stronger and wealthier party due to pressures from the powerful law firms.
  • This process sometimes is included in an ancillary agreements[42] or in some other agreements that the customers are not aware in advance that they already have agreed to pre-dispute arbitration by purchasing a good or taking a job which is mandatory.
  • The discovery can be more limited in arbitration process.
  • As there are limited avenues for appeal it cannot overturn an erroneous decision easily.
  • Arbitrary awards have fewer enforcement options than judgments in some legal systems.
  • As there are many arbitrators on the panel they fight for getting schedules of their hearing which can lead to delays.
  • Arbitration awards unlike court judgments are not directly enforceable. Party that seeks to enforce an award must resort to judicial remedies.[43]
  • In some arbitration agreements the parties are required to pay for the arbitrators that adds an extra layer of legal cost which can be prohibitive in small customer dispute.
  • In some of the systems the recovery of attorneys’ fees is unavailable which makes it difficult for consumers to get legal representation.
  • The potential to generate billings by attorneys may be less than pursuing the dispute through trial.

 5. Arbitration and contract:

Arbitration is a final and binding, private and judicial determination of a dispute with the help    of a third party which also is an alternative to court litigation. It is a consensual process. There are types of arbitration that came into being because of disputes among the parties while having any sort of contract regarding commercial, consumer and labor contracts and so on. Any party cannot be forced to arbitrate unless he agrees to do so. A contract containing arbitral clause can be a general contract but if any dispute arises it has to be solved by arbitration.

 6. Personal opinion:

The advantages of arbitration have also helped it become more convenient for people in resolving their disputes. The advantages of arbitration have also helped it become more convenient for people in resolving their disputes whereas litigation is a lengthy process for solving any sort of disputes among parties. To avoid the consumption of time and huge expenses people prefer arbitration as a tool for solving their problems occurring in a contract. Even though it has some drawbacks still it has become an important method of solving the disputes.

 7. Conclusion:

Arbitration is a very common word to be used now-a-days as it helps to resolve the disputes among parties while having a contract with each other. Different countries have different arbitral institutions to solve the problems. Although there are variations among the countries, the main purpose is to solve the dispute with the help of an arbitrator who will be giving award at the end of hearing. This process is mandatory if in any contract any sort of arbitral clause is used. If the parties have any dispute regarding the contract they must go through arbitration to solve their problem before going to a court. There are different institutions worldwide that are successfully serving the purpose of resolving disputes. Arbitration has been nick named as ‘businessman’s method of resolving disputes’ and it is helping the people at a large scale whoever faces any sort of problems regarding the contract.


ª     Jhabvala, N. H. (2003). The Law of Contract (The Indian Contract Act). Educational & Law Publishers.

ª     Mitra, A. K. (2003). Commercial Law including company Law & Industrial Law (Business Law) (25 th ed.). Kolkata: The World Press Private Limited.

ª     Hans Wehberg, Pacta Sunt Servanda, The American Journal of International Law, Vol. 53, No. 4 (Oct, 1959), p.775.;Trans-Lex.org Principle of Sanctity of Contracts

ª     The Permanent Court of Arbitration. International Alternative Dispute Resolution: Past, Present and Future, (2000)

ª     Christian Buhring-Uhle and Gabriele Lars Kirchhof. Arbitration and Mediation in International Business, 2nd Edition (2006)

ª     (n.d.). Retrieved February 18, 2012, from http://www.trans-lex.org/970500

ª     (2008, April). Retrieved February 18, 2012, from http://www.hkiac.org/index.php/en.hkiac

ª     (2010, October). Retrieved from http://www.deaconslaw.com/eng.knowledge/knowledge 42.htm#intro%28B%29

ª     (2007). Retrieved February 18, 2012, from http://www.sec.gov/answers/arbproc.htm

ª     (2010, August). Retrieved February 19, 2012, from http://www.finra.org/ArbitrationAnd Mediation/Arbitration/Process

ª     (2008). Retrieved February 19, 2012, from http://tutor2u.net/law/noted/contract-elements.html

ª     (2010, May). Retrieved February 19, 2012, from http://www.dispute.it/?page id=7

ª     (2003, October). Retrieved February 18, 2012, from http://www.expertlaw.com/library/business/contract law.html

ª     (n.d.). Retrieved February 19, 2012, from http://en.wikipedia.org/wiki/Arbitration

ª     (n.d.). Retrieved February 19, 2012, from http://www.mediate.com/articles/grant.cfm

ª     (2009). Retrieved February 19, 2012, from http://www.law.com/jsp/nlj/PubArticleNLJ.jsp?id=1202432336394&Arbitration option needednfor fair negotiation&slreturn=1

ª     (n.d.). Retrieved February 18, 2012, from http://www.colorado.edu/conflict/peace/treatment/arbitrat.htm

ª     Hobbs Padget & Co v J C Kirkland (1969) 113 SJ 832

ª     Swiss Bank Corporation v Novrissiysk Shipping (1995) 1 Lloyd’s Rep 202

ª     Deutsche Schachtbauv R’As al-Khaimah National Oil Co [1990] 1 AC 295

ª      (1948) 2 Cal. 171

ª     AIR (1951) Cal 147

ª     AIR (1976) Supreme Court 2257

ª      (1948) 2 Cal. 171

[2] http://www.colorado.edu/conflict/peace/treatment/arbitrat.htm

[3] (1948) 2 Cal. 171

[4] AIR (1951) Cal 147

[5] (Goldberg, Green and Sander, 1985,  p. 189.)

[6] AIR (1976) Supreme Court 2257

[7] (1948) 2 Cal. 171

[8]  Value given by promissor to promisee in exchange for a value provided by the promisee to the promissor

[9] Section 2(h) of the Act defines the term contract as “any agreement enforceable by law”. There are two essentials of this act, agreement and enforceability. Section 2(e) defines agreement as “every promise and every set of promises, forming the consideration for each other.”Again Section 2(b) defines promise in these words: “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted becomes a promise.”

[10]Consideration is the concept of legal value in connection with contracts. It is anything of value promised to another when making a contract.

[11] Law developed by judges through decisions of courts. Also known as Case law or Precedent.

[12] Legal system inspired by Roman Law and provide all citizens with an accessible and written collection of laws    which apply to them and which judges must follow.

[13] Hans Wehberg, Pacta Sunt Servanda, The American Journal of International Law, Vol. 53, No. 4 (Oct, 1959), p.775.;Trans-Lex.org Principle of Sanctity of Contracts

[14] Proposal/offer from a party to the other and other party or offeree might accept the proposal made by the offeror.

[15] Intention of creating a relationship that is legal such as marriage or selling and buying goods from a party etc.

[16] Consideration means exchange which refers one party exchanging for a value provided by another party.

[17] The parties must be eligible to have a contract with each other in case of age, mental status etc.

[18] The parties must be willing to have a contract without any sort of influence, fraud or misrepresentation.

[19] The object for which contract is being made must not be illegal, immortal or opposed to public policy

[20] The agreement has to be clear and must be possible to ascertain the meaning of the agreement.

[21] The agreement must have the ability of being performed. Promise of doing something impossible can’t be enforced.

[22] Agreements cannot be void.

[23] http://en.wikipedia.org/wiki/Arbitration_clause

[24] Allowing the parties to agree that any litigation from that contract will be initiated in a specific forum. A simple forum selection clause covering both the proper law of the contract and the forum for resolving any disputes might read:

“This contract is governed by the laws of England and any dispute shall be finally resolved by the English courts.”

[25] Term of contract in which the parties specify that dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction.

[26] http://en.wikipedia.org/wiki/Arbitration_clause

[27] Swiss Bank Corporation v Novrissiysk Shipping (1995) 1 Lloyd’s Rep 202

[28] Hobbs Padget & Co v J C Kirkland (1969) 113 SJ 832

[29] Mangistaumunaigaz Oil Production v United Kingdom World Trade[1995] 1 Lloyd’s Rep 617

[30] Norske Atlas Insurance Co. v London General Insurance Co (1927) 28 Lloyd’s List Rep104

[31] Deutsche Schachtbauv R’As al-Khaimah National Oil Co [1990] 1 AC 295

[32] The London Court of International Arbitration is world’s recognized leading arbitral institutions providing efficient, flexible an impartial administration of arbitration and other wide range of solutions.

[33] http://en.wikipedia.org/wiki/Arbitration_clause

[34] http://www.nadr.co.uk/background/arbsteps.php

[35] It is the largest independent regulator for all the securities firms doing business in the United States.

[36] http://www.deaconslaw.com/eng/knowledge/knowledge_42.htm#intro%28B%29

[37] http://www.hkiac.org/index.php/en/hkiac

[38] Hong Kong International Arbitration Centre (HKIAC) has been resolving disputed for more than 25 years and is Asia’s leading international dispute resolution service provider.

[39] The China International Economic and Trade Arbitration Commission (CIETAC) is an organization that resolves any type of dispute among different parties related to foreign investment.

[40] The Renminbi literally peoples’ currency is the official currency of the people of the mainland in China. Such as Yuan, Jiao (Mao). Although the official abbreviation is CNY but it is also commonly abbreviated as RMB.

[41] http://www.trans-lex.org/970500

[42] It is supplementary or subordinate rights arising from a primary right that exists depending upon or reasonably linked to a main right or claim.

[43] In the UK small claims in the County Court are dealt by a procedure called “small claims arbitration”, although the proceedings are held in front of a district judge, paid by the state. In Russia the courts dealing with commercial disputes is referred to as the Supreme Court of Arbitration of the Russian Federation, although it is not arbitral tribunal in the sense of the word.